Bond ETFs

For many investors, bond ETFs offer an attractive risk profile combined with a solid, if moderate, income potential. Bond ETF investing is subject to less risk than most other investment options since the underlying securities are bonds or indexes that track the performance of bonds, rather than more volatile securities. Active management can reduce the volatility of bond ETFs even further, making them one of the safest of the ETF investments; other bond ETFs feature higher payoffs for somewhat higher levels of risk.

Treasury yield curve bond ETFs


A number of bond ETFs are designed to allow investors to base their investments on whether they believe the Treasury bond yield curve will flatten or steepen. Treasury yield curve bond ETFs typically track both long-term and short-term results, making them a versatile addition to a bond ETF portfolio. A typical example of a Treasury yield curve bond ETF would be an ETF that tracks performance and returns of two-year Treasury bond futures contracts and pays off on gains in the Treasury yield curve for these securities. Because these bond ETF yields are based on the performance of Treasury bonds, they tend to produce profits and losses reflective of the overall performance of the economy as a whole. Additionally, because Treasury bond ETF yields are based on futures contracts, they typically experience higher volatility than asset-based bond ETF. As a result, Treasury yield curve bond ETFs offer higher returns on investment as well as higher risks of financial loss compared to asset-based bond ETFs.

Treasury yield curve bond ETF list


Due to market conditions, no list of current ETFs can be comprehensive. However, here are the generally accepted market leaders for treasury yield curve bond ETFs:

• iShares Lehman 1-3 Year (SHY)
• iShares Lehman 7-10 Year (IEF)
• iShares Lehman 20 plus Year (TLT)
• Long-Term Government Bond ETF (VGLT)

Asset-based bond ETFs


In contrast to yield curve bond ETFs, asset-based bond ETFs are not based on futures options, but on actual underlying assets including liquid corporate bonds and government-issued Treasury bonds. A short bond ETF focuses on short-term securities with durations of under a year and typically provide moderate yields with low risk, making them a popular choice with investors who need to balance other high-risk investments. Asset-based bond ETF yields are highly dependent on the current economic conditions, and can serve as a hedge against economic downturns since longer-term Treasury bonds typically increase in value during periods of turmoil on the stock markets.

Asset-based bond ETF list


Major asset-based bond issues include:

• iShares Lehman Aggregate Bond (AGG)
• iShares iBoxx $ Investment Grade Corporate Bond (LQD)
• iShares Lehman TIPS Bond (TIP)
• Total Bond Market ETF (BND)

Bond ETF vs. bond fund


Bond ETFs typically offer lower fees than bond mutual funds and provide better tax advantages into the bargain. In many cases, bond ETFs have outperformed comparable mutual fund offerings, making the comparison of bond ETF vs bond fund a matter of the investor’s personal preference. For most investors, bond ETFs are as good as or better than the equivalent bond funds and offer more flexibility, since they can be readily traded on the open market.

Bond ETF investing


Aggregate funds are a solid way to enter the bond ETF market; they typically skew toward shorter-term investments and provide diversification and exposure for risk-averse investors who may be new to ETFs. Many aggregate bond ETFs are index funds, making them even more diverse and minimizing overall risk for investors.
Tim Ord
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